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Corporate Pension Funded Status Continues to Decline

Citigroup Pension Liability Index & Milliman 100 Pension Funding Index

The uncertain economic outlook and the Federal Reserve Bank’s inclination to delay the next interest rate hike penalized defined benefit plans. The Milliman 100 Pension Funding Index survey reported that the funded status of the 100 largest corporate pension plans has declined in the second quarter to 75.7%, which is down from 77.9% at the end of the first quarter and 82.7% at the end of 2015. The corporate discount rate at the end of June stood at 3.45% compared to 4.16% at the end of 2015, which was the primary driver in the decline in liability valuation. The increase in the value of fixed income assets, especially long-duration, offset only some of the losses on the liability side, due to the mismatch between liabilities and hedging assets. Milliman projects that the discount rate will have to rise to 4.35% by the end of 2017 in order to improve the funded status to over 90%, assuming assets return over 7% per year on average during the next year and a half.

*The Milliman Pension Funding Index is based on actual pension plan accounting information for the 100 largest defined benefit pension plans sponsored by U.S. public companies. The index is based on a ratio of the market value of assets compared to the projected benefit obligation (PBO), as a measure of the pension liabilities.